Meaning of Demand In Economics: We turn now to a study of how the signal system of an enterprise economy guides resources into the uses desired by consumers. We identified the elements of the signal system as prices (including prices of resources as well as prices of goods and services), profits, and losses. We start our study of this system with the consumer, for it is the consumer who generates the initial impulse. He does this by sending out a “call” for particular goods and services. We shall trace this call as it is interpreted by the firms, transmitted to the owners of resources, and eventually answered by the production and sale of goods and services. First, however, we must examine the nature of the call itself. We must study human wants and how an individual ranks them and decides which shall get satisfied and which shall go unsatisfied.
MEANING OF DEMAND IN ECONOMICS
In economics, the call of a consumer for a particular item is known as his demand for that item. Individual demand, as viewed by the economist, is a panoramic picture of a particular consumer’s attitude, or reaction, toward some particular commodity. The economist defines individual demand as a schedule of the quantities of a good which a consumer stands ready to take off the market at a series of prices at a given moment of time. It is this schedule which represents his call for the good.
The market demand for a good is the summation of the demand schedules of all of the individuals participating in the market. This is illustrated in Table 7-1. The five prices in the left-hand column are to be regarded as selections from a larger range of prices beginning well above $2.00 a pound and declining by penny (or smaller) intervals to a price well below 25^ a pound.
The reactions of consumers A, B, C, and D to the five prices are shown in columns 2, 3, 4, and 5. Consumer A, for example, will buy no coffee if the price is $2.00 and 7 pounds if the price is 25^. In between these two prices, the quantities he would take, assuming coffee can be bought in small fractions of a pound, would vary continuously. The quantities bought at the prices shown in column 1 are his responses to a few of the specific prices in his total schedule. The same holds true of consumers B, C, and D. The total market call for coffee is shown in column 6. It is the summation of the calls of the participants. It is the market demand for coffee. It shows the total number of pounds that the participants will take at each of the selected prices.
We stress the fact that demand, as used by the economist, refers to a schedule linking a series of prices to a series of quantities. The single word “demand” does not refer to the quantity purchased at one particular price. For example, the economist does not say that the market demand for coffee at a price of $1.00 is seven pounds. Rather he says that the amount demanded or quantity taken at a price of $1.00 is seven pounds. The single word “demand” is reserved to designate the entire schedule. A precise language is as important to the economist as it is to all other scientists.
GRAPHIC PRESENTATION OF DEMAND
The economist finds it convenient and desirable to present material like in graphic form. In graphing demand schedules, it is customary to let the Y- or vertical-axis represent prices and the X- or horizontal-axis represent quantities. It is a graphic presentation of the materials.
Graphic presentation is very helpful in explaining the operation of market forces. Considerable use will be made of the device throughout the book. It should be remembered, however, that the smooth curves of the economist’s graphs reflect precise mathematical relationships which can never be completely realized in the real world where prices and quantities cannot be varied by infinitely small amounts. Thus the A curve in the graph which shows A’s demand for coffee is built upon the known relationship between the 5 prices and the 5 quantities shown in A’s demand schedule.
All that we really have is 5 points. When we connect them by a smooth curve we make the assumption that the quantity of a good can be varied by infinitely small amounts and that A will respond to infinitely small changes in price by infinitely small changes in the quantities he will buy. The same holds true for B, C, and D. The curve marked T is the market demand curve.
We are now in a position to define demand curves. An individual demand curve is a graphic statement or presentation of the quantities of a good which a particular consumer stands ready to take off the market at all possible prices at a given moment of time. A market demand curve is a graphic representation of the quantities of a good which all of the participants in a market stand ready to take off the market at all possible prices at a given moment of time.